Ashford 6: - Week 5 - Final Paper

Question:

Final Paper

Focus of the Final Paper

Write a five-to seven-page financial statement analysis of a public company, formatted

according to APA style as outlined in the Ashford Writing Center. In this analysis you will
discuss the financial health of this company with the ultimate goal of making a recommendation
to other investors. Your paper should consist of the following sections: introduction, company
overview, horizontal analysis, ratio analysis, final recommendation, and conclusions. Your
paper needs to include a minimum of two scholarly resources in addition to the textbook as
references.

Here is a breakdown of the sections within the body of the assignment:

Company Overview
Provide a brief overview of your company (one to two paragraphs at most). What industry is it
in? What are its main products or services? Who are its competitors?

Horizontal Analysis of Income Statement and Balance Sheet

Prepare a three-year horizontal analysis of the income statement and balance sheet of your
selected company. Discuss the importance and meaning of horizontal analysis. Discuss both
the positive and negative trends presented in your company.

Ratio Analysis
Calculate the current ratio, quick ratio, cash to current liabilities ratio, over a two-year period.
Discuss and interpret the ratios that you calculated. Discuss potential liquidity issues based on
your calculations of the current and quick ratios. Are there any factors that could be erroneously
influencing the results of the ratios? Discuss liquidity issues of competitive companies within
the same industry.

Recommendation
Based on your analysis would you recommend an individual invest in this company? What
strengths do you see? What risks do you see? It is perfectly acceptable to state that you would
recommend avoiding this company as long as you provide support for your position.

Writing the Final Paper

1. Must be five to seven double-spaced pages in length, and formatted according to APA style
as outlined in the Ashford Writing Center.
2. Must include a title page with the following:

a. Title of paper
b. Student’s name
c. Course name and number
d. Instructor’s name
e. Date submitted
3. Must begin with an introductory paragraph that has a succinct thesis statement.

4. Must address the topic of the paper with critical thought.

5. Must end with a conclusion that reaffirms your thesis.

6. Must document all sources in APA style, as outlined in the Ashford Writing Center.

7. Must include a separate reference page, formatted according to APA style as outlined in the

Ashford Writing Center.

Answer:

Student’s Name – Kevin Martinez

Instructor’s Name- Debra Touhey

Final Paper
Company Overview

General Motors is an American multinational corporation. Company’s headquarters’ is based in

Detroit, Michigan. The company is engaged in building cars, trucks and automobile parts, their

designing and selling. Company has its production facilities in 37 countries and operates under

13 brand names. The company meets the demands for the customers under the brand called

Cadillac, Opel, Chevrolet, and Buick etc. It is engaged in marketing of flex fuel vehicles in

countries like Thailand, Australia and other global markets. The automotive financial needs are

also met by General Motors Finance Company. The company has its business divided into two

parts which can be explained as follows

Automotive: Company aims at building and selling best vehicles in the world. It has a global

portfolio of crossovers, cars, trucks and other vehicles. Co has a worldwide coverage and meets

the demands of local and fleet customers through global independent dealers. Co derives major

portion of sales volumes outside USA in emerging countries like China, Brazil, Russia, India etc.

Company’s automotive business is divided into 4 segments like GMNA, GME, and GMIO AND

GMSA.

Automotive financing: this business is carried out by GM financial services. Retail automobile

sale contracts are purchased by the company. Company’s major source of revenue is through

purchasing , securitization of finance receivables and its financing. This is also a major source

of cash flow for the company.

Horizontal Analysis of Income Statement and Balance Sheet

Horizontal analysis, also known as trend analysis is a technique of analyzing the financial

statements whereby the items in the financial statements are compared over a period of time to

determine the changes. It depicts the changes in revenues, profits, assets such as cash,

receivables, liabilities such as bills payable, creditors over a certain course of time. The period

of comparison can be either two or more than that depending on the number of years for which

this analysis is to be done. There are two different methods of analyzing such as absolute

comparison and percentage comparison. Under absolute method currency amounts are

compared whereas in percentage method, percentage difference is calculated for comparisons.

This analysis is important when performance of many companies needs to be compared.

Horizontal Analysis – Balance Sheet

Horizontal Anlaysis - Balance Sheet Base Year Increase or decrease Increase or decrease Increase or decrease
2011 2012 Amount % 2013 Amount % 2014 Amount %

Assets
Current assets
- cash 31,647 27,410 (4,237) -13.39% 28,993 (2,654) -8.39% 28,176 (3,471) -10.97%
- receivables 9,949 10,395 446 4.48% 8,535 (1,414) -14.21% 9,078 (871) -8.75%
- inventories 14,324 14,714 390 2.72% 14,039 (285) -1.99% 13,642 (682) -4.76%
- deferred income taxes 1,657 9,429 7,772 469.04% 10,349 8,692 524.56% 9,760 8,103 489.02%
- other current assets 2,670 8,048 5,378 201.42% 19,585 16,915 633.52% 23,014 20,344 761.95%
Total current assets 60,247 69,996 9,749 16.18% 81,501 21,254 35.28% 83,670 23,423 38.88%

Property plant and equipment 22,957 25,845 2,888 12.58% 25,867 2,910 12.68% 27,743 4,786 20.85%
equity and other investments 6,790 6,883 93 1.37% 8,094 1,304 19.20% 8,350 1,560 22.97%
goodwill 29,019 1,973 (27,046) -93.20% 1,560 (27,459) -94.62% 1,427 (27,592) -95.08%
intangible assets 10,013 6,809 (3,204) -32.00% 5,668 (4,345) -43.39% 4,983 (5,030) -50.23%
deferred income taxes 2,900 27,922 25,022 862.83% 22,736 19,836 684.00% 25,414 22,514 776.34%
other long term assets 12,677 9,994 (2,683) -21.16% 20,918 8,241 65.01% 26,090 13,413 105.81%
Total non current assets 84,356 79,426 (4,930) -5.84% 84,843 487 0.58% 94,007 9,651 11.44%

TOTAL ASSETS 144,603 149,422 4,819 3.33% 166,344 21,741 15.03% 177,677 33,074 22.87%

Liabilities and stockholders equity

Current liabilities
- short term debt 1,682 5,518 3,836 228.06% 14,158 12,476 741.74% 14,988 13,306 791.08%
-accounts payable 24,494 25,166 672 2.74% 23,621 (873) -3.56% 22,529 (1,965) -8.02%
-accrued liabilities 22,756 23,308 552 2.43% 23,357 601 2.64% 26,562 3,806 16.73%
- deferred revenues - - 1,276 1,276 1,622 1,622
Total current liabilities 48,932 53,992 5,060 10.34% 62,412 13,480 27.55% 65,701 16,769 34.27%

Non current liabilities

- long term debt 11,650 10,532 (1,118) -9.60% 22,025 10,375 89.06% 31,853 20,203 173.42%
- deferred tax liabilities 12,336 13,169 833 6.75% - (12,336) -100.00% - (12,336) -100.00%
- deferred revenues - - - 1,249 1,249 1,556 1,556
- pensions and other benefits 31,911 34,729 2,818 8.83% 26,596 (5,315) -16.66% 31,276 (635) -1.99%
-minority interests 871 756 (115) -13.20% 567 (304) -34.90% 567 (304) -34.90%
-other long term liabilities 783 - (783) -100.00% 10,888 10,105 1290.55% 11,267 10,484 1338.95%
Total non current liabilities 57,551 59,186 1,635 2.84% 61,325 3,774 6.56% 76,519 18,968 32.96%

Total stockholders equity 38,120 36,244 (1,876) -4.92% 42,607 4,487 11.77% 35,457 (2,663) -6.99%

Total Liabilities and stockholders equity 144,603 149,422 4,819 3.33% 166,344 21,741 15.03% 177,677 33,074 22.87%

From the Horizontal Balance Sheet analysis the positive trends that can be identified is that

there has been consistent growth in the fixed assets of the company, indicating that the

company is planning to expand as investments in capital assets are done by the company. Also

the current assets have also increased indicating that the company can meet its short term

liability. However there has been negative trend also. There has been consistent decrease in

the shareholder’s equity indicating that the owner’s fund is decreasing and also there has been

substantial increase in debts owed by the company which is again negative for the company.

Horizontal Analysis – Income Statement

Horizontal Anlaysis - Income Statement Base year Increase or decrease Increase or decrease Increase or decrease
2011 2012 Amount % 2013 Amount % 2014 Amount %

Revenues 150,276 152,256 1,980 1.32% 155,427 5,151 3.43% 155,929 5,653 3.76%
Cost of revenues 131,171 141,443 10,272 7.83% 137,373 6,202 4.73% 142,121 10,950 8.35%
Gross profit 19,105 10,813 (8,292) -43.40% 18,054 (1,051) -5.50% 13,808 (5,297) -27.73%
Operating expenses
- sales, general and administrative 12,163 13,593 1,430 11.76% 12,382 219 1.80% 12,158 (5) -0.04%
- other operating expenses 1,286 27,583 26,297 2044.87% 541 (745) -57.93% 120 (1,166) -90.67%
Total operating expenses 13,449 41,176 27,727 206.16% 12,923 (526) -3.91% 12,278 (1,171) -8.71%
Operating income 5,656 (30,363) (36,019) -636.83% 5,131 (525) -9.28% 1,530 (4,126) -72.95%
Interest expense 540 489 (51) -9.44% 334 (206) -38.15% 403 (137) -25.37%
other income 869 595 (274) -31.53% 2,661 1,792 206.21% 3,119 2,250 258.92%
Income before taxes 5,985 (30,257) (36,242) -605.55% 7,458 1,473 24.61% 4,246 (1,739) -29.06%
provision for income tax 110 (34,831) (34,941) -31764.55% 2,127 2,017 -634.98% 228 118 -1858.31%
other income 3,412 1,562 (1,850) -54.22% - (3,412) -100.00% - (3,412) -100.00%
Net income from continued operations 9,287 6,136 (3,151) -33.93% 5,331 (3,956) -42.60% 4,018 (5,269) -56.74%
other (97) 52 149 -153.61% 15 112 -115.46% (69) 28 -28.87%
Net income 9,190 6,188 (3,002) -32.67% 5,346 (3,844) -41.83% 3,949 (5,241) -57.03%
preferred dividend 1,605 1,329 (276) -17.20% 1,576 (29) -1.81% 1,145 (460) -28.66%
Net income availabe to common shareholders 7,585 4,859 (2,726) -35.94% 3,770 (3,815) -50.30% 2,804 (4,781) -63.03%

The positive trend for horizontal analysis for Income Statement is that there has been consistent

increase in the revenues earned by the company. However the negative trend is that the gross

profit and the net income have reduced significantly in the last 3 years.

Ratio Analysis

Formulas 2013 2014

Current assets 81,501 83,670

Current liabilities 62,412 65,701
Inventories 14,039 13,642
Cash 28,993 28,176
Current ratio Current assets/ current liabilities 1.31 1.27

(Current assets – inventories ) / current

Quick ratio liabilities 1.08 1.07

Cash to current liabilities ratio Cash / current liabilities 0.46 0.43

Current ratios indicate that whether the company has sufficient short term assets like cash ,

accounts receivable etc to pay off its short term debts like creditors, bills payable etc. The higher

the current ratio is the greater the capacity of the company to meet its liabilities. In given case

current ratio for the company is decreasing from 1.31 in Yr 2013 to 1.27 in yr 2014. This

indicates that company might face issues going forward to meet its short term obligations.

Quick ratio calculates the short term liquidity position for the company. The quick ratio for the

company was 1.08 in Yr 2013 and decreased to 1.07 in 2014 which indicates that company

might be heading towards liquidity crunch.

Cash ratio for the company has also decreased with going year from 0.46 in 2013 to 0.43 in

2014 which means that company is facing cash shortages and might not have enough cash in

future to meet its debts. Thus calculation of these ratios indicate that company might face

liquidity crisis going forward and may not have enough cash or short term assets to pay off its

debt . The factors which could be affecting these ratios might be the problems relating to

management of inventory, tax standards for collection of receivables may be inappropriate, and

the cash burn rate could be enormous.

Recommendations

The company is engaged in the manufacturing selling and designing of cars and trucks. The

company was considered as largest manufacturer of automobiles and its parts till 2007. In the

year 2008, the company faced some financial crisis due to which the performance of the

company started deteriorating and in the years gone by company has not shown any marked

improvement. The company however has some strength like it operates in 157 countries and

has a strong presence in china market which is considered as the largest growing automotive

market. The company works under 18 brand names and thus has strong brand presence. The
company has 18% market share in US market. It works under some brands like Chevrolet, GMC

, Cardillac which are highest and most reputed brand for the company and company derives

80% revenues from these brands. Despite these strengths the risks that company face is that

cost structure for the company is high which may not be acceptable by users compared to cost

efficient cars introduced by its competitors. Price for raw materials may increase in future which

might reduce the company profits. Company faces intense competition from its competitors like

Toyota motors and Volkswagen. Despite of these risks and strengths of the company, it might

not be a viable option to invest in this company as, the analysis of the ratios indicate that the

liquidity positioning of the company is tightening up as company is moving forward and a certain

time may come where co may not have enough cash to pay its debts and satisfy its obligations.

However it is not always correct to rely on ratios because ratios might be manipulated and

errors may turn up in calculations which might not give accurate results. However comparing

two year report may not give a complete picture of investment. Making and analyzing a detailed

report may be helpful in recommending whether to invest in the company or not. But seeing the

given figures one may not find it suitable to invest in the company as high return may not be

expected from companies which are heading towards liquidity crunch.